October 22, 2024: Written by Erik Derr, Esq. & David Frankel, Esq.
After the FTC’s recent attempt to ban non-compete agreements was stopped by the courts, the Office of the General Counsel for the National Labor Relations Board (the “NLRB”), Jennifer A. Abruzzo, issued Memorandum GC 25-01 affirming her intent not only to “urge the Board not only to find certain non-compete provisions unlawful,” but to also drastically limit “stay or pay” provisions, which require employees to repay certain employer pre-paid benefits in the event of resignation.
General Counsel’s Position on Non-Competes
On May 30, 2023 Ms. Abruzzo issued Memorandum GC 23-08, advising that in her estimation non-compete agreements violate the National Labor Relations Act (the “Act”). Per Ms. Abruzzo, such provisions “reasonably tend to chill employees the exercise of Section 7 rights under the Act” (pertaining to employee organization or bargaining) by denying “them the ability to quit or change jobs by cutting their access to other employment opportunities they are qualified for based on their experiences, aptitudes, and preferences as to type and location of work.”
Specifically Memorandum GC 23-08 outlines that non-competes deny employees of their Section 7 rights by “chilling” employees from 1) concertedly threatening to resign to demand better working conditions, 2) carrying out concerted threats to resign or secure improved working conditions, 3) seeking employment with a competitor to obtain better working conditions, 4) soliciting co-workers to join them working with a competitor, and 5) seeking employment, at least in part, to specifically engage in protected activity with workers at an employer’s workplace. This said, the Memorandum did not rule out potentially valid non-compete agreements that restrict only managerial or ownership interests or those pertaining to independent-contractor relationships.
Memorandum GC 25-01 expands on the non-compete discourse from May 2023 and argues that where an employer has maintained an unlawful non-compete, “rescission alone will fail to remedy all the harms caused”, and advocates “make whole relief”. These measures may take the form of claims for deprivation of better job opportunity (the difference between what would have been received and what was actually received during the period at issue while employed), costs associated with compliance (lost wage payments during post-employment covenant period) or relocation/retraining costs if an employee is forced to move or obtain training in a new field to comply with the terms of a non-compete. Claims for these types of damages will, per Ms. Abruzzo, allow employees to come forward with evidence of harm to best approximate the actual damage caused by the non-compete.
General Counsel’s Position on “Stay or Pay” Provisions
The General Counsel’s recent Memorandum details that agreements requiring repayment in the event of separation similarly restrict employee mobility and make resignation difficult or untenable due to the “fear of termination for engaging in activity protected by the Act.” These clauses often take the form of repayment for training or certifications but can also extend to penalty fees for separation.
These clauses present a financial barrier to separation and serve to “lock employees in their jobs.” While Ms. Abruzzo recognized that these provisions allow employers to recoup payments toward employee benefits where the employee does not stay long enough for the business to reap the anticipated return, this still has the potential to impermissibly interfere with employee mobility. Accordingly, she will urge the NLRB to find that any “stay or pay” provision is presumptively unlawful unless the employer can advance a legitimate business interest and is narrowly tailored to minimize infringement on Section 7 rights. These criteria boil down to proving that (1) is voluntarily entered into in exchange for a benefit (the employee has the choice of agreeing to employer pre-payment for trainings); (2) has a reasonable and specific repayment amount; (3) has a reasonable “stay” period; and (4) does not require repayment if the employee is terminated without cause.
Violations for these clauses are recommended to include rescission of the subject clause (or replacement with a clause that is not unreasonable or disproportionate to the actual costs at issue) and the non-enforcement of such payment provisions (via the erasure of the alleged debt or employer repayment of any sums collected). Employees may also be compensated if they can demonstrate that (1) there was a vacancy available for a job with a better compensation package; (2) they were qualified for the job; and (3) they were discouraged from applying for or accepting the job because of the stay-or-pay provision.
Recognizing that this proposed framework will significantly burden employers, the General Counsel offered to refrain from prosecuting violations for sixty days to allow employers to cure any preexisting stay or pay provisions so that the repayment amounts or stay periods are not unreasonable under the circumstances (i.e. amounts do not exceed cost of benefit and stay periods are not unreasonably long).
What does this mean for employers? First, it is important to remember that these General Counsel memorandums are not law and do not represent the NLRB’s position on these issues. That said, employers would be wise to review and consider revising agreements including “stay or pay” clauses to remove them entirely, or, to ensure that they are voluntary and narrowly tailored with respect to the costs at issue and timeframe for the stay period. These clauses should not apply to employees who are terminated without cause. Employers who have already demanded repayment from employees should seek counsel as to how to best proceed in the face of this memorandum.
Be sure to follow along with Becker’s Staffing Practice for additional updates from the NLRB and its Office of the General Counsel.